How A Strategic Fit Creates Competitive Advantage And Superior Profitability

One of the core paradigms of strategic management is the concept of strategic fit. A ‘fit’ (also referred to as match, consistency, or co-alignment) between an organisation’s strategy, structure and processes helps explain whether a company performs successfully.

However, firms nowadays are exposed to radical technological change and shortening product life cycles, which force them to act flexibly and rapidly. Therefore, the question arises whether ‘strategic fit’ still works effectively and enhances firms’ performance today.

What is strategic fit?

If one intangible barrier prevents rival firms from imitating a company’s strategic positioning, that is a strategic fit. The term ‘strategic fit’ stems from the fit between a strategy and external context and how the company’s chosen set of activities and its capabilities fit together.

In the What is strategy? article, Porter (1996) once mentioned that operational effectiveness is not equivalent to strategy. While operational effectiveness aims to achieve excellence in individual activities, strategy is about combining activities, not a collection of parts. Put simply, competitive advantages are generated from the way activities fit and reinforce one another. As a result, one activity’s cost is lowered because of the way other activities are performed.

Types of fit

Fit is important because discrete activities often affect one another. A product line, for instance, with a variety of models is more valuable when combined with an inventory and order processing system that minimises the need for stocking finished goods.

Michael Porter (1996) insists there are three types of fit that contribute to a cohesive and competitive strategy, in which the whole matters more than any individual part and a company’s success cannot be explained by specifying individual strengths, core competencies or critical resources.

Simple consistency

Occurs when each activity (function) within the organisation aligns with the overall strategy, supporting core goals and ensuring individual activities do not contradict or weaken each other. It makes the strategies easier to communicate to stakeholders and can be implemented within the organization.

Mutually reinforcing activities

The second type of fit goes beyond simple consistency because when different activities enhance and complement each other, they create a unique value proposition. For example, a high-end fashion brand may reinforce its luxury positioning by combining exclusive designs with premium materials, aligning marketing with an upscale image, and offering personalized customer service. Each activity amplifies the brand’s luxury appeal.

Optimisation of effort

As with this type, coordination and information exchange across activities are required to eliminate redundancy and minimise wasted effort. Product design choices, for example, can eliminate the need for after-sale service and make it possible for customers to perform service activities by themselves.

Why is strategic fit important?

Strategic fit among many activities is fundamental and crucial to the sustainability of an entity’s competitive advantage. For rival firms or new entrants to match an array of interlocked activities rather than just simply imitate a particular ordering process or a sale-force approach or replicate a set of product features, the chance is highly unlikely due to substantial investment costs and the trade-offs confronted by.

Take the BMW automotive producer as an example, all car assemblers know that it produces its car to enhance driver appeal but it is extraordinarily difficult to replicate how BMW has learned to integrate the decisions and actions across many independent subunits to fit everything together. 

Strategic fit also means that poor performance in one activity will affect the performance in others. As weaknesses are exposed and more prone to getting attention, companies get more pressure and incentives to improve operational effectiveness, which makes imitation even harder.

The McKinsey 7S Model

Featured in the book In Search of Excellence, by former McKinsey consultants Thomas J. Peters and Robert H. Waterman more than 30 years ago,  the framework is a classic example of a model explaining the complexity of an organisation and the need for a strategic fit among internal factors of an organisation to be successful.

The 7S represents the characteristics of the organisation that are classified as “hard” and “soft” elements. Hard elements are usually identified and influenced by management at ease while soft elements are more intangible and influenced by corporate culture.

The hard elements are the components that are more tangible, easier to identify, and often directly influenced by management. These elements include:

Strategy

The strategic plan deployed by organisations to gain sustainable competitive advantage, either with lower cost or differentiation or both.

The analysing questions can be:

• How should the organisation proceed to resolve the specific business problem?

• What is its strategy and its priorities?

• How will the organisation achieve its strategic objectives?

• How does the organisation compete in the market? What are their competitive capabilities?

• How does the organization respond to changes in customer demand or the business environment?

Structure

The corporate hierarchy, the chain of command and divisional outlines that show how operations function and interconnect.

The analysing questions can be:

• How is the organization organized?

• How are reporting and working relationships structured (hierarchical, flat etc.)? Who reports to whom?

• How do its teams align and collaborate on shared goals?

• What is its process for making decisions? Is it through centralization, empowerment, decentralization, etc.?

• How does the organization share information (formally and informally)?

Systems

The procedures, daily activities, workflows and decisions that standardise the operations of an organisation.

The analysing questions can be:

• Can the organisation execute the strategy with the existing business system or does it have to develop a new one?

• How does the organisation track progress and performance?

• What internal processes and guidelines does the organisation have in place to stay on track?

The soft elements are the intangible, less visible aspects of an organization that are harder to define and measure. However, they are equally crucial for achieving organizational alignment and effectiveness. The soft elements include:

Style

The leadership approach to managing the firm and how well leaders influence performance, productivity and corporate culture.

The analysing questions can be:

• What leadership style and cultural qualities will help the organisation to achieve a strategic objective?

• What is its current management approach?

• How do their employees respond to it?

Staff

The personnel and size of the workforce of a company as well as how well they are trained and motivated to complete the tasks and goals.

The analysing questions can be:

• Is there anything the organisation can do to support the growth of its team members?

• What are the current staffing needs?

• Are there any gaps in required capabilities or resources?

• What is its plan for addressing those needs?

Skills

The talents and capabilities of the organization’s staff and management to achieve the goals outlined in its strategy.

The analysing questions can be:

• What are the strongest skills within the organization? What are their weaknesses?

• How is it going to fill the skill gap? Which skills are required? 

• Is the current employee’s skill set sufficient for the job?

• How does it monitor, assess, and improve those skills?

Shared values

The accepted standards and norms within the company that influence the behaviour of the entire staff and management.

The analysing questions can be:

• What principles help the organisation to achieve its goals?

• What is its vision for the future? What is its mission to get there?

• What are the core values? How does the organisation incorporate them into daily activities?

In summary, attaining a strategic fit among a company’s activities helps to complete the answer to the question ‘What is strategy?’. Without a fit, there would be no distinctive strategy and little sustainability. Management will again revert to simpler tasks to oversee the process and improve the operational effectiveness to maintain the organisation’s relative performance, in which the non-stop marathon begins.

References

D’Aveni, R.A and Ravenscraft, D.J 2017, ‘Strategic fit’, Wiley Encyclopedia of Management 3rd edition, available at <https://www.researchgate.net/publication/313924776_Strategic_Fit>.

Floyd, S.W and Lane, P.J 2014, The Concept of Strategic Fit, Oxford University Press, available at <https://www.google.com.au/books/edition/The_Concept_of_Strategic_Fit/7jpkAQAAQBAJ?hl=en&gbpv=1&dq=elements+of+strategic+fit&pg=PR2&printsec=frontcover>.

Hamel, G and Prahalad, C.K 2005, ‘Strategic intent’, Harvard Business Review, available at <https://hbr.org/2005/07/strategic-intent>.

McKinsey & Company 2023, Enduring ideas: the 7-S framework, McKinsey & Company, available at <https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/enduring-ideas-the-7-s-framework>.

Porter, M.E 1996, ‘What is strategy?’, Harvard Business Review, available at <https://hbr.org/1996/11/what-is-strategy>.

Will, K 2024, McKinsey 7S model, Investopedia, available at <https://www.investopedia.com/terms/m/mckinsey-7s-model.asp>.